<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number: 33-302132
TRI-STATE 1ST BANK, INC.
(Exact name of small business issuer as specified in its charter)
Ohio 34-1824708
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
16924 St. Clair Avenue
P.O. Box 796
East Liverpool, Ohio 43920
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 385-9200
-------------
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year $3.7 million.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and ask price on March 11, 1998, was
$7,715,493 (285,759 shares at $27.00 per share).
As of December 31, 1997, there were issued and outstanding 410,800 shares of
the registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1997 are incorporated by reference into Parts I and II, and portions of the
Proxy Statement for the annual shareholders meeting on March 18, 1998
are incorporated by reference into Part III.
<PAGE>
PART I
Item 1. Business
General
- -------
Certain information required by this section is presented on page 1 of the
1997 Annual Report and is incorporated herein by reference.
Tri-State 1st Bank, Inc. (the "Company") is the parent company for 1st
National Community Bank (the "Bank"), with principal executive offices of
both the Company and the Bank located in East Liverpool, Ohio. At
December 31, 1997, the Bank had 31 full-time and 11 part-time employees.
Supervision and Regulation
- --------------------------
The Company is subject to regulation under the Bank Holding Company Act of
1956, as amended and the Securities and Exchange Commission.
Deposits maintained with the Bank are insured up to regulatory limits by the
FDIC, and accordingly, are subject to deposit insurance assessments to
maintain the Bank Insurance Fund ("BIF") administered by the FDIC. The
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") was enacted on August 9, 1989. FIRREA significantly affected the
financial industry in several ways, including higher deposit insurance
premiums, more stringent capital requirements and new investment limitations
and restrictions. The Federal Deposit Insurance Corporation Act of 1991 ("The
FDIC Improvement Act") covered a wide expanse of Banking regulatory issues.
The FDIC Improvement Act dealt with the capitalization of the BIF, with
deposit insurance reform, including requiring the FDIC to establish a risk -
based premium assessment system, and with a number of other regulatory and
supervisory matters. On December 11, 1995, the FDIC adopted reduced
assessment rates for the semiannual assessment period beginning January 1,
1996. The resulting annual assessment rates ranged from $0.00 per $100 of
deposits for banks classified in the highest capital and supervisory
evaluation categories to $.27 per $100 of deposits for banks classified in the
lowest capital and supervisory evaluation categories, subject to a minimum
assessment. As a result of the Bank meeting certain capital requirements, the
premium assessment for 1997 and 1996 was minimal.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the Interstate Banking Law"), various federal banking laws were amended to
provide for nationwide interstate banking, interstate bank mergers and
interstate branching. The Interstate Banking Law allowed, effective September
29, 1995, the acquisition by a bank holding company of a bank located in
another state. Interstate bank mergers and branch purchase and assumption
transactions will be allowed effective June 1, 1997; however, states may "opt
out" of the merger and purchase and assumption provisions by enacting laws
that specifically prohibit such interstate transactions. States may, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to June 1, 1997. The Bank exercised use of the
Interstate Banking Law to facilitate the acquisition of a branch in the state
of West Virginia, as referenced to in the "Market Area" discussion below.
The monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of banks and bank
holding companies. The nature of future monetary policies and the effect of
such policies on the future business and earnings of the Company cannot be
predicted.
Management is not aware of any current recommendations by regulatory
authorities which, if they were to be implemented, would have a material
effect on liquidity, capital resources or operations of the Company.
Competition
- -----------
The Bank functions in a highly competitive environment. In addition to other
commercial banks, savings and loans, and savings banks, the Bank must also
contend with other providers of financial services including finance
companies, credit unions and insurance companies. The Bank's immediate
competition emanates specifically from National City Bank, Banc One, Potters
Savings & Loan, Central Federal Savings & Loan, Perpetual Savings Bank,
and Hancock County Savings and Loan. Each of these competitors operate
in varying capacities within Columbiana County, Ohio and Hancock County,
West Virginia, the market region shared with the Bank. Despite having access to
less resources and smaller lending limits, the Bank remains competitive in its
service area with respect to interest rates and fees charged on loans,
interest rates paid on time and savings deposits, and service charges on
deposit accounts. All of the Bank's deposits emanate from inside the United
States.
Market Area
- -----------
The Bank's primary market area is East Liverpool and Lisbon, Ohio and
surrounding communities in the tri-state area which includes eastern Ohio,
northern West Virginia and southwestern Pennsylvania and is known as the Upper
Ohio Valley. In an attempt to enhance its branch network, the Bank acquired
the assets and assumed the deposits and other liabilities of United
National Bank's New Cumberland, West Virginia branch office. The purchase
price was $157,000 in cash plus the value of all deposit accounts based upon
the balance as of the date of closing at a premium of 5 1/2% of account
balances. Consummation and closing occurred on September 1, 1997. This
acquisition is ultimately expected to have a positive impact on net income and
future earnings per share.
1
<PAGE>
STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES
- -------------------------------------------------
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY, INTEREST
RATES AND INTEREST DIFFERENTIAL
Information required by this section is presented on pages 5 through 6 of the
1997 Annual Report and is incorporated herein by reference.
II. INVESTMENT PORTFOLIO
A. Book Value of Investment Portfolio
Information required by this section is presented on pages 18 and 19 of the
1997 Annual Report and is incorporated herein by reference.
B. Maturity and Yield Information
The following table sets forth the maturity of investments at December 31,
1997, and the weighted average yields of such investments. The yields
reflected are calculated based on the basis of the cost and effective yields
weighted for the scheduled maturity of each investment.
<TABLE>
<CAPTION>
1 Year 5 Years
Within 1 Through Through Over 10
Year Years 10 Years Years Total
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U. S. Treasury securities
and other U.S. Government
agencies and corporation $ 1,871 $ 5,390 $ 1,305 $ - $ 8,566
Obligations of states and
political subdivisions 99 1,252 3,698 618 5,667
Mortgage-backed securities - 21 231 277 529
Equity securities - - - 223 223
--------- --------- --------- --------- ---------
$ 1,970 $ 6,663 $ 5,234 $ 1,118 $ 14,985
========= ========= ========= ========= =========
U. S. Treasury securities
and other U.S. Government
agencies and corporations 5.86% 6.16% 6.76% -%
Obligations of states and
political subdivisions 9.12 7.46 7.48 6.34
Mortgage-backed securities - 7.79 6.36 7.46
Equity securities - - - 7.00
--------- --------- --------- ---------
5.75% 6.78% 7.44% 7.39%
========= ========= ========= =========
</TABLE>
Weighted average yields are computed on a tax equivalent basis using a federal
tax rate of 34% based on cost, adjusted for amortization of premium or
accretion of discount.
C. Aggregate Book Value of Securities Exceeding 10% of Stockholders' Equity
Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. Government, there
are no investments of any one issuer which exceeds 10% of the Company's
shareholders' equity at December 31, 1997.
III. LOAN PORTFOLIO
A. Types of Loans
The following table sets forth the composition of the loan portfolio by type
of loan at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996
-------------------------- --------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loan
Real Estate Loans:
Construction $ - -% $ 84 0.35%
1 - 4 Family 12,192 46.81 11,443 47.53
Commercial 4,477 17.19 3,218 13.37
Commercial Loans 5,639 21.65 5,544 23.03
Consumer Loans 3,737 14.35 3,784 15.72
---------- ---------- ---------- ----------
Total 26,045 100.00% 24,073 100.00%
========== ==========
Less:
Deferred loan origination fees
and costs 32 22
Allowance for possible loan losses 309 290
---------- ----------
Net loans $ 25,704 $ 23,761
</TABLE>
The Bank's lending policy requires the application and satisfaction of certain
underwriting standards prior to funding any loan, among which are
documentation requirements to include credit and collateral value analysis.
Credit qualification entails evaluation of business cash flows or consumer
income available to service debt payments. Secondary sources of repayment,
including collateral and guarantees may be requested as well. Lending
opportunities typically are restricted to the market areas the Bank's
branches serve.
2
<PAGE>
The Bank's lending strategy has historically focused on the origination and
retention of a mixture in its portfolio of commercial loans, one-to-four
family mortgage loans and, to a lesser extent, working capital loans in the
form of credit lines and term notes, personal loans, and home equity loans.
Commercial real estate loans are granted for the acquisition or improvement of
real property. Generally, commercial real estate loans do not exceed 70% of
the appraised value of the property pledged to secure the transaction. With
repayment typically contingent upon successful operation of the subject real
estate, this is carefully scrutinized prior to approval.
Real estate construction loans are granted for the purpose of construction
improvements to real property, both commercial and residential. Real estate
loans secured by one-to-four family residential housing properties are granted
subject to statutory limits regarding the maximum percentage of appraised
value of the mortgaged property. Residential loan terms are normally
established based upon factors such as interest rates in general, the supply
of money available to the Bank and the demand for such loans.
Consumer loans represent the extension of financing to customers for personal
expenditures or household purposes. Creditworthiness is evaluated on the basis
of projected repayment capacity as well as credit history. Such loans are
granted in the form of installment or revolving transactions.
B. Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table exhibits the maturity of commercial and real estate
construction loans outstanding as of December 31, 1997, and the amounts due
after one year classified according to the sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
Maturing
Within Through After
1 Year Five Years Five Years Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial and agricultural $ 3,287 $ 1,743 $ 275 $ 5,305
Real estate-construction - - - -
---------- ---------- ---------- ----------
Total $ 3,287 $ 1,743 $ 275 $ 5,305
========== ========== ========== ==========
Sensitivity of loans to interest rates:
Predetermined interest rates $ 494 $ 264 $ 758
Floating interest rates 1,249 11 1,260
----------- ---------- ----------
Total $ 1,743 $ 275 $ 2,018
=========== ========== ==========
</TABLE>
C. Risk Elements
Certain information required by this section is presented on pages 2, 7 and 20
of the 1997 Annual Report and is incorporated herein by reference.
The following table sets forth information regarding non-performing assets:
At December 31,
--------------------------
1997 1996
---------- ----------
(Dollars in Thousands)
Loans past due 90 days or more and
still accruing interest $ 102 $ 236
Nonaccrual loans - -
Impaired loans - 111
---------- ----------
Total non-performing loans 102 347
Other real estate owned - 54
Total non-performing assets $ 102 $ 401
Non-performing assets to
allowance for loan losses 33.01% 138.28%
Non-performing assets include non - performing loans and other real estate
owned. The Bank's non-performing assets, do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources. Impaired
loans are commercial and commercial real estate loans for which it is probable
that the Bank will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The Bank evaluates such loans for
impairment individually and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Bank may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial real estate loan.
Factors considered by management in determining impairment include changes in
repayment capacity, payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the difference
between the present value of the expected future cash flows related to the
loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loans.
When foreclosure is probable, impairment is measured based on the fair value
of the collateral.
3
<PAGE>
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment delays,
which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation to
the principal and interest owed.
Although the Bank has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their agreements is dependent upon the economic
stability of the tri-state area. At December 31, 1997, the Corporation did
not have any concentrations of loans to borrowers engaged in similar
activities exceeding 10% of total loans.
While it is impossible to predict what 1998 loan losses will be, there are no
potential problem loans outstanding at the end of any period presented for
which there was serious doubt as to the ability of the borrower to comply with
present loan repayment terms except as discussed above.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. Analysis of Loan Loss Experience
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At December 31,
------------------------
1997 1996
--------- ---------
(Dollars in Thousands)
Balance, January 1 $ 290 $ 266
Charge-offs:
Commercial and agricultural - 16
Real estate mortgages - -
Consumer 47 25
--------- ---------
Total charge-offs 47 41
Loan recoveries:
Commercial and agricultural - 1
Real estate mortgages - -
Consumer 12 15
--------- ---------
Total loan recoveries 12 16
--------- ---------
Net charge-offs 35 25
--------- ---------
Provision charged to
operations 54 49
--------- ---------
Balance, December 31 $ 309 $ 290
========= =========
Net charge-offs as a percent
of average loans 0.14% 0.11%
The Bank believes that the allowance for loan losses at December 31, 1997 is
adequate to cover losses inherent in the portfolio. However, there can be no
assurance that the Bank will not sustain additional losses in future periods,
which could be substantial in relation to the size of the allowance at
December 31, 1997.
4
<PAGE>
B. Allocation of the Allowance for Possible Loan Losses
The allocation of the allowance for possible loan losses is predicated upon
periodic review and evaluation of individual loans, past loss experience, risk
elements associated with particular loan categories, and the impact of the
economic environment. The allowance for loan losses is available to absorb
credit losses arising from individual or portfolio segments. When losses on
specific loans are identified, the portion deemed uncollectable is charged
off.
The Bank monitors its loan portfolio on a monthly basis, taking into
consideration the status of potential problem loans and non - performing
assets, as well as trends in delinquencies. In addition to the estimate
of the amounts and timing of expected future cash flows on impaired loans,
other components of the allowance for loan losses include estimates for loan
losses associated within the commercial, consumer and real estate mortgage
portfolios, general amounts for historical loss experience, uncertainties in
estimating losses, and inherent risks in the various credit portfolios.
V. DEPOSITS
A. Average Deposits and Rates Paid by Type
The following tables summarize the daily average amount of deposits and rates
paid on such deposits for the
periods indicated.
Year Ended December 31,
------------------------
1997 1996
--------- ---------
Amount
- --------------------------
(Dollars in thousands)
Noninterest-bearing demand $ 6,300 $ 5,127
Interest-bearing demand 8,073 7,560
Savings 8,492 7,575
Money market 4,946 4,847
Time 12,921 11,648
--------- ---------
Total $ 40,732 $ 36,757
========= =========
Rate
- --------------------------
Noninterest-bearing demand -% -%
Interest-bearing demand 2.73 2.75
Savings deposits 2.99 2.98
Money market 2.99 3.01
Time deposits 5.37 5.33
The following table sets forth the remaining maturity of time certificates of
deposit in denominations of $100,000 or more.
December 31,
1997
---------
(In thousands)
3 months or less $ 1,141
Over 3 months through 6 months 100
Over 6 months through 12 months 667
Over 12 months 487
---------
Total $ 2,395
=========
5
<PAGE>
VI. RETURN ON EQUITY
The required information is incorporated by reference to page 2 of the 1997
Annual Report.
VII. SHORT-TERM BORROWINGS
This information is not required as the average balance of short-term
borrowings during 1997 was less than 30 percent of stockholders' equity.
Item 2. PROPERTIES
THE FOLLOWING ARE THE PRINCIPAL LOCATIONS OF OPERATIONS OF THE COMPANY AND
BANK:
Own or Term of
Description Rent Lease
- --------------------- -------- ---------
Executive offices of the
Company and Bank and
main branch
16924 St. Clair Avenue
East Liverpool, OH 43920 Own N/A
Branch office
Jefferson & Lincoln Way
Lisbon, OH 44432 Own N/A
Branch Office Lease
15703 St Rt 170 expiration:
Calcutta, OH 43920 Rent 12/01/05
Branch CBCT Lease
Wal-Mart Store expiration:
Calcutta, OH 43920 Rent 05/17/02
Branch office
1200 North Chestnut Street
New Cumberland, WV 26047 Own N/A
Management asserts that for insurance purposes all facilities and equipment
are subject to periodic appraisal and all properties are adequately insured.
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings, other than ordinary routine litigation
incidental to banking, to which the Company or the Bank is a party or of which
any of the Company's or Bank's property is subject.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
Item 5. MARKET OF COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The required information is incorporated by reference to pages 1 through 2 of
the 1997 Annual Report.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The required information is incorporated by reference to pages 2 through 8 of
the 1997 Annual Report.
Item 7. FINANCIAL STATEMENTS
The required information is incorporated by reference to pages 9 through 31 of
the 1997 Annual Report.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
6
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The required information is incorporated by reference to pages 4 through 12 of
the Proxy Statement.
Item 10. EXECUTIVE COMPENSATION
The required information is incorporated by reference to pages 7 through 8 of
the Proxy Statement.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is incorporated by reference to pages 9 through 12 of
the Proxy Statement.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is incorporated by reference to pages 13 through 14
of the Proxy Statement.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report, except as may be
indicated:
(1) Financial Statements:
The following Consolidated Financial Statements of Tri-State 1st Bank, Inc.
together with the Report of Independent Auditors dated January 16, 1998, are
included in the 1997 Annual Report of the registrant which is referenced in
Part II, Item 7 - Financial Statements and are incorporated herein:
Page
Reference
---------
Report of Independent Auditors. 9
Consolidated Balance Sheet, December 31, 1997 and 1996. 10
Consolidated Statement of Income for the years ended December 31,
1997 and 1996. 11
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997 and 1996. 12
Consolidated Statement of Cash Flows for the years ended December 31,
1997 and 1996 13
Notes to Consolidated Financial Statements 14-31
(2) Exhibits:
Exhibits filed herewith or incorporated by reference are set forth in the
following table prepared in accordance with item 601 of Regulation S-B.
(3.1) Articles of Incorporation of the registrant are incorporated
herein by reference to the registrant's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission on
March 8, 1996.
(3.2) By-laws of the registrant are incorporated by reference to the
registrant's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on March 8, 1996.
(13) Annual Report to Security Holders for the year ended December 31,
1997, filed herewith as exhibit 13.
(21) Subsidiary of the registrant incorporated herein by reference to
the registrant's Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on March 8, 1996.
(27) Financial Data Schedule for the year ended December 31, 1997,
filed herewith as exhibit 27.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Tri-State 1st Bank, Inc.
Date: March 30, 1997 /s/ Charles B. Lang
---------------------------------
Charles B. Lang
President
(Principal Executive Officer)
Date: March 30, 1997 /s/ Keith R. Clutter
---------------------------------
Keith R. Clutter
Secretary
(Principal Operating Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons on behalf of the registrant and in
the capacities and on the dates indicated.
Name Title Date
- ------------------ -------------- ---------------
/s/ Charles B. Lang
- -------------------------------- President March 30, 1997
Charles B. Lang
/s/ Keith R. Clutter
- -------------------------------- Secretary March 30, 1997
Keith R. Clutter
/s/ William E. Blair
- -------------------------------- Director March 30, 1997
William E. Blair
/s/ Stephen W. Cooper
- -------------------------------- Director March 30, 1997
Stephen W. Cooper
/s/ G. Allen Dickey
- -------------------------------- Director March 30, 1997
G. Allen Dickey
/s/ Marvin H. Feldman
- -------------------------------- Director March 30, 1997
Marvin H. Feldman
/s/ R. Lynn Leggett
- -------------------------------- Director March 30, 1997
R. Lynn Leggett
/s/ John P. Scotford, Sr.
- -------------------------------- Director March 30, 1997
John P. Scotford, Sr.
/s/ John C. Thompson
- -------------------------------- Director March 30, 1997
John C. Thompson
<PAGE>
TRI-STATE 1ST BANK, INC.
TABLE OF CONTENTS
Page
Number
------
Business and Common Stock 1
Financial Highlights 2
Management's Discussion and Analysis of 3-8
Financial Condition and Results of Operations
Report of Independent Auditors 9
Consolidated Financial Statement
Balance Sheet 10
Statement of Income 11
Statement of Changes in Stockholders' Equity 12
Statement of Cash Flow 13
Notes to Consolidated Financial Statements 14-31
Officers and Directors 33
<PAGE>
BUSINESS
Tri-State 1st Bank, Inc. (the "Company") is the parent company for 1st
National Community Bank (the "Bank"). The Company was formed as an Ohio
corporation on April 24, 1996, to own and control all of the capital stock of
the Bank, a national banking association. The Company is a bank holding
company which, under existing laws, is restricted to activities generally
relating to banking. At the present time, the Company does not actively
conduct any business, and does not intend to employ any individuals other than
officers who do not receive compensation for serving in such capacity, but
utilizes the support staff and facilities of the Bank from time to time. The
Company's primary regulator is the Board of Governors of the Federal Reserve
System.
The Bank was chartered as a national banking association in June, 1987,
headquartered near East Liverpool, Ohio. Business is conducted through its
three full service offices located in Columbiana County, Ohio, and one full
service office in Hancock County, West Virginia. The Bank operates a full
service community bank, offering a variety of financial services to meet the
needs of its market area. Services include: accepting demand and time
deposits from the general public and together with borrowings and other funds,
using the proceeds to originate secured and unsecured commercial and consumer
loans and provide construction and mortgage loans, as well as home equity and
personal lines of credit. In addition, funds are also used to purchase
investment securities. The Bank's deposits are insured to the legal maximum
by the Federal Deposit Insurance Corporation.
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
Tri-State 1st Bank, Inc.'s common stock is traded locally and is not listed on
any organized exchange, although application was made recently for listing the
stock of the Company on the OTC Bulletin Board. The following table presents
the quarterly high and low prices as reported by Advest, Inc., a market maker
in the Company's common stock and previously the Bank's common stock, for the
recent two year period ending December 31, 1997. Also included in the table
are dividends per share on the outstanding common stock. This table is
adjusted to reflect a 2 for 1 stock split effective on July 9, 1997.
Cash Dividends
Declared
High Low Per Share
---- --- ---------
1996:
First Quarter $16.00 $15.00 $ -
Second Quarter 16.00 15.00 0.13
Third Quarter 17.00 16.00 -
Fourth Quarter 17.00 16.00 0.13
1997:
First Quarter $17.00 $16.00 $ -
Second Quarter 20.00 17.00 -
Third Quarter 22.00 20.00 0.14
Fourth Quarter 22.00 20.00 0.15
At December 31, 1997, there were issued and outstanding 410,800 shares of
common stock, which were held by approximately 371 shareholders of record.
The Company's ability to pay dividends to shareholders is dependent upon the
receipt of dividends from the Bank, because the Company currently has not
source of income other than dividends from the Bank. The Bank may not declare
or pay dividends on its common stock if such payment would cause its
regulatory capital to be reduced below minimum requirements imposed by OCC
regulations. The Company is also subject to certain regulatory restrictions
imposed by the Federal Reserve Board on the payment of dividends to its
shareholders.
1
<PAGE>
Financial Highlights
The following tables set forth certain information concerning the consolidated
financial position and certain performance ratios of the Company and its
subsidiary, 1st National Community Bank at the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in Thousands, Except Per Share Information)
<S> <C> <C> <C> <C> <C>
Selected Financial Data
Assets $ 48,326 $ 43,175 $ 38,636 $ 34,915 $ 29,850
Investment securities 14,985 12,187 10,477 9,840 7,802
Loans 26,012 24,052 22,117 19,048 15,757
Allowance for loan losses 309 290 266 233 185
Deposits 42,904 38,690 34,358 31,111 26,545
Other Borrowings 177 279 375 115 -
Stockholders' equity 4,515 4,036 3,686 3,225 3,188
Summary of Operations
Interest income $ 3,396 $ 3,039 $ 2,704 $ 2,274 $ 1,962
Interest expense 1,332 1,223 1,043 825 749
--------- --------- --------- --------- ---------
Net interest income 2,064 1,816 1,661 1,449 1,213
Provision for loan losses 54 49 68 50 112
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 2,010 1,767 1,593 1,399 1,101
Other operating income 351 349 309 248 245
Other operating expense 1,685 1,485 1,355 1,290 1,049
--------- --------- --------- --------- ---------
Income before income taxes 676 631 547 357 297
Income taxes 151 161 145 75 75
--------- --------- --------- --------- ---------
Net income $ 525 $ 470 $ 402 $ 282 $ 222
========= ========= ========= ========= =========
Per Share Data (1)
Earnings $ 1.28 $ 1.14 $ 0.98 $ 0.69 $ 0.54
Cash dividends declared 0.29 0.26 0.24 0.22 0.19
Book Value 10.99 9.82 8.97 7.85 7.76
Average shares outstanding 410,800 410,800 410,800 410,800 410,800
Market Information (1)
High $ 22.00 $ 17.00 $ 15.88 $ 9.50 $ 10.00
Low 16.00 15.00 10.38 9.25 9.50
At December 31 22.00 17.00 15.88 9.50 9.75
- -------------------------------------------
(1) Adjusted for 2- for -1 stock splits effective July 9, 1997 and
February 22, 1995.
Selected Financial Ratios
Return on average assets 1.15% 1.14% 1.12% 0.87% 0.79%
Return on average equity 12.31 12.21 11.54 8.79 7.13
Average equity to average assets 9.35 9.33 9.63 9.94 11.36
Equity to assets at end of period 9.34 9.35 9.54 9.24 10.68
Non-performing assets to total assets 0.21 0.80 1.11 0.74 1.18
Non-performing loans to total loans 0.39 1.44 1.44 0.76 1.14
2
<PAGE>
CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are dependent on the operations of the
Bank. The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between interest earned on its loans
and investment securities portfolio and other interest earnings assets, and
its cost of funds consisting of interest expense paid on its deposits and
other borrowings. Net interest income is also affected by the relative
amounts of interest earning assets and liabilities. Net income of the Bank is
also impacted by its provision for loan losses, as well as other operating
income and expenses. Other operating income consists primarily of service
charges on deposit accounts, while other operating expenses is comprised of
salaries and employee benefits, occupancy expenses, and other general and
administrative expenses. Earnings of the Bank are impacted by general local
economic, competitive and regulatory conditions, particularly changes in
market interest, and actions of regulatory agencies.
MANAGEMENT STRATEGY
The Company's philosophy is to combine quality personal service and strategic
office locations to offer a variety of loan and deposit products tailored to
fit the needs of its customers. While the Company has no specific plans to
significantly expand its branch network, management is continually identifying
and assessing opportunities for future expansion and at the present time has
entered into a contract to operate an in-store branch at the Wal-Mart
Superstore in Calcutta beginning in 1998.
The Bank's lending strategy has historically focused on the origination and
retention of a balance in its portfolio of real estate commercial mortgage
loans, one-to-four family mortgage loans and, to a lesser extent, working
capital commercial loans in the form of credit lines and term notes, personal
loans, automobile loans and home equity loans. Commercial real estate loans
are granted for the acquisition or improvement of real property. Generally,
commercial real estate loans do not exceed 70% of the appraised value of the
property pledged to secure the transaction. The focus and the application of
prudent underwriting standards by the Bank is designed to reduce the risk of
loss on the its loan portfolio.
To measure the relationship of interest-earning assets and interest-bearing
liabilities and their impact on net interest income, the Bank maintains an
asset/liability management program. One of the principal functions of the
program is to monitor the level to which the balance sheet is subject to
interest rate risk. The goal of the program is to manage the relationship
between interest-earning assets and interest-bearing liabilities to minimize
the fluctuations in net interest spread and achieve consistent growth in net
interest income during periods of changing interest rates. To accomplish its
strategies, adjustable-rate residential mortgage and commercial loans are
originated, as well as shorter term consumer loans. The investment securities
portfolio, which is used primarily for liquidity purposes, has historically
been comprised of short term (three to five years) U.S. Treasury and Agency
obligations, and AA and AAA tax-exempt Municipal and State obligations.
Although management typically holds investment securities purchased until
maturity, approximately 87% of the portfolio at December 31, 1997 was
classified as available for sale to allow management the flexibility in
managing that portfolio in a changing market rate environment.
The Bank attempts to manage the interest rates it pays on deposits, while
maintaining a stable to growing deposit base by providing convenient and
quality service and competitive rates to its customers. Historically, the
Bank has had minimal borrowings, which are originated through a credit
arrangement with the Federal Home Loan Bank of Cincinnati, Ohio ("FHLB"), and
has relied upon its customer deposit base as its primary source of funds.
3
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars,
without consideration for changes in the relative purchasing power of money
over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services,
since such goods and services are affected by inflation. In the current
interest rate environment, liquidity and the maturity structure of the Bank's
assets and liabilities are critical to the maintenance of acceptable
performance levels.
YEAR 2000
A great deal of information has been disseminated about the global computer
year 2000. Many computer programs that can only distinguish the final two
digits of the year entered, a common programming practice in earlier years,
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or else are expected
to be unable to compute payment, interest or delinquency. The Company is in
the process of assessing the effect of year 2000 on the Bank's operating plans
and systems. The Company has developed a plan for identifying, renovating,
and testing and implementing its systems for year 2000 processing and internal
control requirements. Although we process our customer and Bank financial
records using an in-house computer system, all of our material data processing
that could be affected by this problem is provided by a third party
application software vendor. Our software vendor has advised us that they
expect to resolve this potential problem before the year 2000. However, if we
are unable to resolve all of our year 2000 issues in time, we would likely
experience potentially significant processing delays, mistakes or failures.
Such items could have a significant adverse impact on our financial condition
and our results of operation. The cost for becoming year 2000 compliant has
not been determined. Management believes that this matter should not have a
material effect on the Company's financial statements.
4
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth for the periods indicated, information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the dollar amount of interest income earned on such assets and
the resultant yields, the dollar amount of interest expense paid on such
liabilities and the resultant rates. The tables also reflect the interest
rate spread for such periods, the net yield on interest-earning assets (i.e.,
net interest income as a percentage of average interest-earning assets) and
the ratio of interest-earning assets to average interest-bearing liabilities.
Average balances are based on daily balances.
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
Average Average Average Average
Balance Interest Yield (1) Balance Interest Yield (1) Balance Interest Yield/Cost
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (2),(3) $ 25,522 $ 2,554 10.01% $ 22,867 $ 2,257 9.87% $ 20,798 $ 2,052 9.87%
Federal funds sold 2,428 134 5.52% 2,784 149 5.35% 1,735 105 6.05%
Investment securities (1) 13,110 858 6.54% 11,274 744 6.60% 9,634 630 6.53%
-------- -------- -------- -------- -------- --------
Total interest-earning assets 41,060 3,546 8.64% 36,925 3,150 8.53% 32,167 2,786 8.66%
-------- -------- --------
Noninterest-earning assets 4,555 4,321 4,000
-------- -------- --------
Total assets $ 45,615 $ 41,246 $ 36,167
======== ======== ========
Interest-bearing liabilities:
Interest-bearing demand deposits 8,073 220 2.73% 7,560 208 2.75% 5,849 162 2.77%
Money market deposits 4,946 148 2.99% 4,847 146 3.01% 4,673 146 3.12%
Certificates of Deposit 12,921 694 5.37% 11,648 621 5.33% 9,964 495 4.97%
Savings deposits 8,492 254 2.99% 7,575 226 2.98% 7,081 212 2.99%
Other borrowings 224 15 6.70% 324 22 6.79% 419 28 6.68%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 34,656 1,331 3.84% 31,954 1,223 3.83% 27,986 1,043 3.73%
-------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities 6,693 5,443 4,697
-------- -------- --------
Total Liabilities 41,349 37,397 32,683
-------- -------- --------
Capital 4,266 3,849 3,484
-------- -------- --------
Total liabilities and
retained earnings $ 45,615 $ 41,246 $ 36,167
======== ======== ========
Net interest income $ 2,215 $ 1,927 $ 1,743
======== ======== ========
Interest rate spread(4) 4.80% 4.70% 4.94%
Net yield on interest-earning
assets(5) 5.40% 5.22% 5.42%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 118.48% 115.56% 114.94%
</TABLE>
(1) Yields on interest-earning assets have been computed on a
taxable-equivalent basis using the federal statutory tax rate of 34%.
(2) Interest on loans included fee income.
(3) Non-accrual loans included.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
5
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in interest
income and interest expense of Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (I) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume).
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997 vs 1996 1996 vs 1995
------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------- ----------- ----------- ----------- ----------- -----------
Volume Rate Net Volume Rate Net
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ON :
Loans receivable $ 262 $ 35 $ 297 $ 204 $ 1 $ 205
Federal funds sold (19) 4 (15) 63 (19) 44
Investment securities 122 (8) 114 108 7 115
----------- ----------- ----------- ----------- ----------- -----------
Total interest income $ 365 $ 31 $ 396 $ 375 $ (11) $ 364
=========== =========== =========== =========== =========== ===========
INTEREST EXPENSE ON :
Interest-bearing demand
deposits $ 14 $ (2) $ 12 $ 47 $ (1) $ 46
Money market deposits 3 (1) 2 5 (5) 0
Certificates of Deposit 68 5 73 84 42 126
Savings deposits 27 1 28 15 (1) 14
Other borrowings (7) 0 (7) (6) 0 (6)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense $ 105 $ 3 $ 108 $ 145 $ 35 $ 180
=========== =========== =========== =========== =========== ===========
NET INTEREST INCOME $ 260 $ 28 $ 288 $ 230 $ (46) $ 184
=========== =========== =========== =========== =========== ===========
</TABLE>
6
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 of $48,326,000 represented an increase of
$5,151,000 or 11.9% from December 31, 1996. This increase was primarily the
result of growth in the investment securities of $2,798,000 or 23.0%, or 54.3%
of total asset growth, and increases in the loan portfolio of $1,960,000 or
8.1%, which is 38.1% of total asset growth. The federal funds sold decreased
by $150,000 from December 31, 1996 to December 31, 1997. Premises and
equipment was $206,000 or 16.9% higher from $1,216,000 to $1,422,000 from
December 31, 1996 to December 31, 1997.
The increase in the investment securities of 23.0% at December 31, 1997 as
compared to 1996 is part of an overall management strategy to invest funds in
the securities portfolio methodically in order to employ funds not required
for loan demand in a manner which will provide safety, liquidity and improved
earnings potential. Of the total increase in the carrying value of investment
securities, $1,620,000 is attributable to U.S. Treasury securities and U. S.
Government Agency securities, and $1,292,000 is attributable to Obligations of
state and political subdivisions.
The 8.1% increase in loans receivable over the twelve month period was
primarily attributable to real estate mortgages which increased for 1-4 family
dwellings by $749,000 or 6.5% and commercial loans secured with real estate
which increased $1,259,000 or 39.1%. Other commercial loans increased $95,000
or 1.7%, while consumer loans and construction loans declined. Management
concentrated its loan origination efforts in 1997 on attaining a more balanced
mix of loans which resulted in a decline in residential real estate loans and
an increase in commercial loans as a percentage of the total loan portfolio.
The allowance for loan losses increased a net of $19,000 for the year ending
December 31, 1997. The overall ratio of the allowance for loan losses to
loans receivable of 1.2% remained essentially unchanged at December 31, 1997
as compared to December 31, 1996. The relationship between the allowance and
loans receivable is a function of credit quality and known risk factors of the
loan portfolio.
At December 31, 1997, nonperforming loans, which are comprised of commercial
and consumer loans contractually past due 90 days or more as to interest and
principal payment but are not on nonaccrual status because of collateral
considerations or collection status, and impaired loans, which represent
nonaccrual commercial loan types, amounted to $102,000, a decrease of $245,000
from December 31, 1996 totals. Total nonperforming loans at December 31,
1997, represented 0.4% of total loans. None of the loans are classified as
impaired. There are 9 loans classified as nonperforming and 4 of those loans
for a combined total of $94,000 comprised 92.2% of this classification. All 4
are secured by residential real estate properties. As part of management's
ongoing assessment of its loan portfolio, no specific portion of the
allowance for loan losses has been allocated to these 4 loans because in the
judgment of the management the loans are adequately secured or are in the
process of collection.
The increase in the Premises and equipment at December 31, 1997, when compared
with 1996 can be attributed in large measure to the acquisition of the banking
office and the equipment in New Cumberland, West Virginia in September of
1997.
Total deposits grew by $4,214,000 or 10.9% in 1997. Such growth was primarily
responsible for funding the total asset growth attained during the year 1997.
Interest-bearing deposits represented 87.2% of total deposit growth in 1997,
or an increase of $3,673,000. The greatest growth occurred in Savings of
$1,447,000 or 34.3% of total deposit growth, and Time deposits of $1,747,000
or 41.5% of total deposit growth, but all types of deposits showed an increase
for the year. The acquisition of the New Cumberland office was a significant
source of this growth of deposits, which totaled $2,254,000 on December 31,
1997.
Stockholders' Equity increased $479,000 or 11.9% during 1997, due to net
retained earnings from operations of $408,000, and a change in the net
unrealized gain on securities in the amount of $71,000 at December 31, 1997.
The increase in the net unrealized gain on securities should be considered
temporary in nature and is attributable to an decrease in the market interest
rate environment at December 31, 1997, as compared to December 31, 1996.
7
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
General. Net income for the year ended December 31, 1997 totaled $525,000 or
$1.28 per share compared to $470,000 or $1.15 per share for 1996. This
increase of 11.7% in net income is principally attributed to increases of
$248,000 or 13.7% in net interest income, which was partially offset by a
$200,000 or 13.5% increase in other operating expense.
Net Interest Income. Net interest income increased in 1997 from 1996 due to
increases in interest income of $357,000 or 11.7%. There was an increase of
$109,000 or 8.9% in total interest expense, although the deposit expense
increase was $116,000 or 9.7%. The average interest rate spread for the
twelve month period increased to 4.80% at December 31, 1997 from 4.70% at
December 31, 1996.
The increase in interest income was derived primarily from earnings on
investment securities, which increased $111,000 or 17.3% from 1996, due
principally to an increase in the average balance in the investment securities
of $1,836,000 or 16.3% at December 31, 1997. Overall average yields on the
investment security portfolio decreased over the twelve month period from
6.60% to 6.54%.
Interest income on loans for the year ended December 31, 1997, increased
$261,000 or 11.6% as compared to the year ended December 31, 1996. The
increase can be attributed to the increase in loan volume and a slight .14%
increase in the average interest yield on loans receivable.
The increase in interest expense compared to 1996 was due to an overall
increase in the volume of interest-bearing deposits which were $3,673,000 or
11.2% higher at December 31, 1997 compared with December 31, 1996, and
constituted 84.8% of total deposits. Most of the increase was in Time and
Savings deposits. Average overall yields paid in 1997 on the interest-
bearing deposit portfolio remained relatively constant with the yields noted
for 1996.
Provision for loan losses. The provision for loan losses for the year ended
December 31, 1997, was $54,000 as compared to $49,000 for 1996. Management
makes periodic provisions to the allowance for loan losses to maintain the
allowance at an acceptable level commensurate with management's assessment of
the credit risk inherent in the loan portfolio.
Other Operating Income. Other operating income, which is comprised
principally of fees and charges on customer deposit accounts, increased by
$3,000 or .7% to $352,000.
Other Operating Expense. Other operating expense increased by $200,000 or
13.5% from 1996 to 1997. Salary and employee benefits increased $136,000 or
21.8% due to the hiring of additional personnel to meet the increased loan and
transactional volumes and the addition to bank staff with the acquisition of
the new office in New Cumberland. The increase was also the result of normal
salary and cost increases related to existing employees.
Occupancy and equipment expenses increased $13,000 from 1996 to 1997 which can
be accounted for essentially by the addition of the New Cumberland office in
addition to normal increases in costs.
Other operating expenses increased $53,000 or 9.4%. This is attributable
primarily to increases of $16,000 in advertising, promotion and public
relations expenses, $8,000 in direct costs in the acquisition of the new
office, $16,000 in checks and ATM expenses from increased customer activity,
and $11,000 in telephone, stationary and postage expenses resulting from a
greater volume of customer activity.
Income Tax Expense. Income taxes decreased by $10,000 or 6.2% in 1997 when
compared to 1996 expense even though there was a $45,000 or 7.1% increase in
pre-tax income. This decrease in taxes is the result of tax planning which
has resulted in more income generated from a greater percentage of tax-exempt
obligations in the securities portfolio.
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Tri-State 1st Bank, Inc.
We have audited the consolidated balance sheet of Tri-State 1st Bank, Inc. and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tri-State
1st Bank, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
January 16, 1998
9
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED BALANCE SHEET
December 31,
1997 1996
------------- -------------
ASSETS
Cash and due from banks $ 4,031,922 $ 3,778,082
Interest-bearing deposits with other banks 101,381 99,018
Federal funds sold 1,550,000 1,700,000
Investment securities available for sale 13,088,215 9,981,741
Investment securities held to maturity
(market value of $1,937,040 and $2,220,220) 1,897,147 2,204,884
Loans 26,012,431 24,051,625
Less allowance for loan losses 309,015 290,247
------------- -------------
Net loans 25,703,416 23,761,378
Premises and equipment 1,422,125 1,215,915
Accrued interest and other assets 531,750 433,763
------------- -------------
TOTAL ASSETS $ 48,325,956 $ 43,174,781
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 6,532,262 $ 5,990,963
Interest-bearing demand 8,250,728 8,027,946
Money market 5,044,746 4,789,319
Savings 9,324,176 7,877,057
Time 13,751,635 12,004,942
------------- -------------
Total deposits 42,903,547 38,690,227
Securities sold under agreement to repurchase 500,000 -
Other borrowings 176,783 279,156
Accrued interest and other liabilities 230,847 169,509
------------- -------------
TOTAL LIABILITIES 43,811,177 39,138,892
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $3.12; 1,000,000 shares
authorized, 410,800 shares issued and
outstanding 1,283,750 1,283,750
Capital surplus 1,610,750 1,610,750
Retained earnings 1,567,189 1,159,212
Net unrealized gain (loss) on securities 53,090 (17,823)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 4,514,779 4,035,889
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,325,956 $ 43,174,781
============= =============
See accompanying notes to the consolidated financial statements.
10
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
1997 1996
------------- -------------
INTEREST INCOME
Loans, including fees $ 2,506,697 $ 2,246,240
Interest-bearing deposits with other banks 3,267 3,059
Federal funds sold 134,047 148,759
Investment securities:
Taxable 517,233 466,960
Exempt from federal income tax 234,634 174,152
------------- -------------
Total interest income 3,395,878 3,039,170
------------- -------------
INTEREST EXPENSE
Deposits 1,317,003 1,201,379
Other borrowings 15,084 21,762
------------- -------------
Total interest expense 1,332,087 1,223,141
------------- -------------
NET INTEREST INCOME 2,063,791 1,816,029
Provision for loan losses 54,195 49,219
------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,009,596 1,766,810
------------- -------------
OTHER OPERATING INCOME
Service charges and fees 248,522 251,756
Investment securities losses, net (3,354) (4,355)
Other 106,421 101,718
------------- -------------
Total other operating income 351,589 349,119
------------- -------------
OTHER OPERATING EXPENSE
Salaries and employee benefits 758,600 623,368
Occupancy 177,311 172,091
Furniture and equipment 135,654 128,326
Other 613,612 560,738
------------- -------------
Total other operating expense 1,685,177 1,484,523
------------- -------------
Income before income taxes 676,008 631,406
Income taxes 150,953 160,954
------------- -------------
NET INCOME $ 525,055 $ 470,452
============= =============
EARNINGS PER SHARE
Basic $ 1.28 $ 1.15
Diluted $ 1.28 $ 1.15
See accompanying notes to the consolidated financial statements.
11
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Common Capital Retained Gain (Loss)
Stock Surplus Earnings on Securities Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1,283,750 $ 1,610,750 $ 793,514 $ (1,817) $ 3,686,197
Net income 470,452 470,452
Dividends declared ($.26 per share) (104,754) (104,754)
Net unrealized loss
on securities (16,006) (16,006)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 1,283,750 1,610,750 1,159,212 (17,823) 4,035,889
Net income 525,055 525,055
Dividends declared ($.29 per share) (117,078) (117,078)
Net unrealized gain
on securities 70,913 70,913
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 1,283,750 $ 1,610,750 $ 1,567,189 $ 53,090 $ 4,514,779
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
12
<PAGE>
TRI-STATE 1ST BANK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income $ 525,055 $ 470,452
Adjustments to reconcile net income to net
cash provided
by operating activities:
Provision for loan losses 54,195 49,219
Depreciation and amortization, net 170,637 179,549
Investment securities losses, net 3,354 4,355
Deferred income taxes 712 12,358
Increase in accrued interest receivable (12,844) (51,253)
Increase in accrued interest payable 5,940 2,057
Other (265) 421,911
------------- -------------
Net cash provided by operating activities 746,784 1,088,648
------------- -------------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from sales 348,372 774,822
Proceeds from principal repayments
and maturities 3,259,230 892,797
Purchases of securities (6,617,597) (2,730,450)
Investment securities held to maturity:
Proceeds from principal repayments
and maturities 331,869 240,397
Purchases of securities - (939,806)
Net increase in loans (1,709,734) (2,010,222)
Acquisition of premises and equipment (177,899) (52,307)
Proceeds from sale of real estate owned 54,421 74,514
Branch acquisitions:
Purchase of loans (330,219) -
Purchase of premises and equipment (157,000) -
Net deposit proceeds 2,334,890 -
------------- -------------
Net cash used for investing activities (2,663,667) (3,750,255)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 1,742,537 4,332,401
Increase in securities sold under
agreement to repurchase 500,000 -
Principal payments on other borrowings (102,373) (95,732)
Cash dividends paid (117,078) (104,754)
------------- -------------
Net cash provided by financing activities 2,023,086 4,131,915
Increase in cash and cash equivalents 106,203 1,470,308
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,577,100 4,106,792
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,683,303 $ 5,577,100
============= =============
See accompanying notes to the consolidated financial statements.
13
<PAGE>
TRI-STATE 1ST BANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
- ----------------------------------------------
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
On April 24, 1996, the stockholders of 1st National Community Bank ("Bank")
approved the Plan of Reorganization of the Bank into a holding company
structure. After approval by the regulatory authorities the reorganization
was completed on May 31, 1996. Each issued and outstanding share of common
stock of the Bank immediately prior to the reorganization was converted into
and exchanged for one share of Tri-State 1st Bank, Inc., ("Company"). As a
result of this transaction, the Bank became a wholly-owned subsidiary of the
Company. The Bank is a national banking association located in Ohio. The
Bank's principal sources of revenues emanate from its commercial, commercial
mortgage, residential real estate and consumer loan financing, as well as a
variety of deposit accounts and services to its customers through three
offices which are located in the East Liverpool and Lisbon, Ohio, areas. The
Company's principal asset is represented by its ownership of the Bank. The
Company is supervised by the Board of Governors of the Federal Reserve System,
while the Bank is subject to regulation and supervision by the Office of the
Comptroller of the Currency.
The consolidated financial statements of the Company include its wholly-owned
subsidiary, the Bank. All intercompany transactions have been eliminated in
consolidation. The investment in subsidiary on the parent company financial
statements is carried at the Company's equity position in the underlying net
assets of the Bank. The financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Investment Securities
- ---------------------
Investment securities are classified, at the time of purchase, based on
management's intention, as securities held to maturity or available for sale.
Debt securities acquired with the intent to hold to maturity are stated at
cost adjusted for amortization of premium and accretion of discount, which are
computed using the interest method and recognized as adjustments of interest
income. Other debt securities have been classified as available for sale, to
serve principally for liquidity purposes. Unrealized holding gains and
losses for available for sale securities are reported as a separate component
of stockholders' equity, net of tax, until realized. Realized securities
gains and losses are computed using the specific identification method.
Interest and dividends on investment securities are recognized as income when
earned.
Common stock of the Federal Home Loan Bank and the Federal Reserve Bank
represents ownership in institutions which are wholly-owned by other financial
institutions. These equity securities are accounted for at cost and are
classified as equity securities available for sale.
Loans
- -----
Loans are reported at their principal amount, net of the allowance for loan
losses. Interest on all loans is recognized as income when earned on the
accrual method. The Bank's general policy is to stop accruing interest on
loans when it is determined that reasonable doubt exists as to the
collectibility of additional interest.
14
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
- ----------------
Interest received on nonaccrual loans is recorded as income or applied against
principal according to management's judgment as to the collectibility of
principal. Loan origination fees and certain direct loan origination costs are
being deferred and the net amount amortized as an adjustment of the related
loan's yield. The Bank is amortizing these amounts over the contractual life
of the related loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charges and all recoveries are credits to the allowance. The
allowance for loan losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based on management's
periodic evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash
flows expected on impaired loans, are particularly susceptible to changes in
the near term.
Impaired loans are commercial and commercial real estate loans for which it is
probable that the Bank will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The Bank individually
evaluates such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Bank may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired, provided the loan is not of a commercial or commercial real estate
classification. Factors considered by management in determining impairment
include payment status and collateral value. The amount of impairment for
these types of loans is determined by the difference between the present value
of the expected cash flows related to the loan, using the original interest
rate, and its recorded value, or as a practical expedient in the case of
collateralized loans, the difference between the fair value of the collateral
and the recorded amount of the loans. When foreclosure is probable,
impairment is measured based on the fair value of the collateral.
Mortgage loans secured by one-to-four family properties and all consumer loans
are generally of smaller balances, and a homogeneous nature, thus are measured
for impairment collectively. Loans that experience insignificant payment
delays, which are defined as 90 days or less, generally are not classified as
impaired. Management determines the significance of payment delays on a
case-by-case basis, taking into consideration all of the circumstances
concerning the loan, the credit worthiness and payment history of the
borrower, the length of the payment delay, and the amount of shortfall in
relation to the principal and interest owed.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated useful
lives of the assets. Expenditures for maintenance and repairs are charged
against income as incurred. Costs of major additions and improvements are
capitalized.
Intangible Asset
- ----------------
The intangible asset consists exclusively of a core deposit acquisition
premium. This core deposit acquisition premium, which was developed based upon
a specific core deposit life study, is amortized using the straight-line
method over eight years. Annual assessments of carrying value and remaining
amortization periods are made to determine possible carrying value impairment,
and appropriate adjustments, as deemed necessary. This asset is a component
of other assets on the balance sheet.
15
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
- -----------------
Real estate owned acquired in the settlement of foreclosed loans is carried as
a component of other assets at the lower of cost or fair value minus estimated
cost to sell. Valuation allowances for estimated losses are provided when the
carrying value of the real estate acquired exceeds the fair value. Direct
costs incurred in the foreclosure process and subsequent holding costs
incurred on such properties are recorded as expenses of current operations.
Employee Benefits
- -----------------
Pension and other employee benefits include contributions to a defined
contribution profit sharing plan covering eligible employees. Contributions
to the profit sharing plan are made at the discretion of the Board of
Directors.
Income Taxes
- ------------
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
Earnings Per Share
- ------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
differs from fully diluted earnings per share in that average period market
values are utilized in calculating average shares outstanding instead of
period ending market values.
All earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement No. 128 requirements.
Cash Flow Information
- ---------------------
The Company has defined cash equivalents as those amounts due from depository
institutions, interest-bearing deposits with other banks, and federal funds
sold.
Cash paid during the year for income taxes and interest on deposits and
borrowings was as follows:
1997 1996
------------- -------------
Interest on deposits and borrowings $ 1,326,147 $ 1,221,084
Income taxes 156,137 144,000
16
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pending Accounting Pronouncements
- ---------------------------------
In June 1996, FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
based on a control-oriented "financial-components" approach. The provisions
of Statement No. 125 are effective for transactions occurring after
December 31, 1996, except those provisions relating to repurchase agreements,
securities lending, and other similar transactions and pledged collateral,
which have been delayed until after December 31, 1997 by Statement No. 127,
"Deferral of the Effective Date of Certain Provisions of Statement No. 125, an
amendment of Statement No. 125." The adoption of the provisions of Statement
No. 127 is not expected to have a material impact on financial position or
results of operations.
In July 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." The Statement establishes standards for reporting and presentation
of comprehensive income and its components (revenue, expenses, gains and
losses) in a full set of general purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements. The
provisions of the statement are effective for all fiscal years beginning after
December 15, 1997. The adoption of this statement is not expected to have a
material impact on financial position or results of operations.
2. EARNINGS PER SHARE
There are no convertible securities which would effect the net income required
to be used in calculating basic and diluted earnings per share, as such, net
income as presented on the consolidated statement of income is used for
computation purposes.
The average shares outstanding for both basic and diluted earnings per share
are 410,800 for the years ending December 31, 1997 and 1996, respectively. As
described in Note 12, the Company implemented a stock option plan during 1997.
Although stock options were granted in August, there is no dilutive effect
since the option exercise prices approximate the average market price for the
Company's stock during 1997.
3. COMMON STOCK SPLIT
On July 9, 1997, the Board of Directors approved a two for one stock split.
In conjunction therewith, the par value was decreased from $6.25 to $3.12.
All references to the number of common shares and per share amounts for 1996
have been restated to reflect the stock split.
17
<PAGE>
4. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities
available for sale are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
other U.S. Government
agency securities $ 8,577,254 $ 19,444 $ (31,540) $ 8,565,158
Obligations of states and political
subdivisions 3,979,340 90,926 (1,173) 4,069,093
Mortgage-backed securities 227,731 2,815 (32) 230,514
------------ ------------ ------------ ------------
Total debt securities 12,784,325 113,185 (32,745) 12,864,765
Equity securities 223,450 - - 223,450
------------ ------------ ------------ ------------
Total $ 13,007,775 $ 113,185 $ (32,745) $ 13,088,215
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
other U.S. Government
agency securities $ 6,800,874 $ 23,257 $ (78,121) $ 6,746,010
Obligations of states and political
subdivisions 2,746,759 32,248 (6,226) 2,772,781
Mortgage-backed securities 250,162 1,901 (63) 252,000
------------ ------------ ------------ ------------
Total debt securities 9,797,795 57,406 (84,410) 9,770,791
Equity securities 210,950 - - 210,950
------------ ------------ ------------ ------------
Total $ 10,008,745 $ 57,406 $ (84,410) $ 9,981,741
============ ============ ============ ============
</TABLE>
18
<PAGE>
4. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities held to
maturity are as follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Obligations of states and
political subdivisions $ 1,598,715 $ 38,950 $ (1,071) $ 1,636,594
Mortgage-backed securities 298,432 3,088 (1,074) 300,446
------------ ------------ ------------ ------------
Total $ 1,897,147 $ 42,038 $ (2,145) $ 1,937,040
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
other U.S. Government
agency securities $ 199,270 $ - $ (457) $ 198,813
Obligations of states and
political subdivisions 1,603,477 22,665 (6,363) 1,619,779
Mortgage-backed securities 402,137 3,046 (3,555) 401,628
------------ ------------ ------------ ------------
Total $ 2,204,884 $ 25,711 $ (10,375) $ 2,220,220
============ ============ ============ ============
</TABLE>
The amortized cost and estimated market value of debt securities by
contractual maturity at December 31, 1997 are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,873,985 $ 1,871,181 $ 99,628 $ 99,574
Due after one year through
five years 6,001,869 6,004,319 636,401 646,018
Due after five years through
ten years 4,067,365 4,140,496 862,686 891,002
Due after ten years 841,106 848,769 298,432 300,446
------------ ------------ ------------ ------------
Total $ 12,784,325 $ 12,864,765 $ 1,897,147 $ 1,937,040
============ ============ ============ ============
</TABLE>
19
<PAGE>
4. INVESTMENT SECURITIES (Continued)
Proceeds from the sales of securities available for sale and the gross
realized gains and losses for the years ended December 31, 1997 and 1996, were
as follows:
1997 1996
---------- ----------
Proceeds from sales $ 348,372 $ 774,822
Gross realized gains - 497
Gross realized losses 3,354 4,852
Investment securities with a carrying value of $2,941,301 and $2,801,325 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits, repurchase agreements and other purposes as required by law.
5. LOANS
Major classifications of loans are summarized as follows:
1997 1996
------------ ------------
Commercial and agricultural $ 5,638,758 $ 5,544,146
Real estate mortgages 16,599,115 14,723,307
Consumer 3,774,558 3,784,172
------------ ------------
26,012,431 24,051,625
Less allowance for loan losses 309,015 290,247
------------ ------------
Net loans $ 25,703,416 $ 23,761,378
============ ============
The Bank grants consumer, commercial and residential loans to customers
throughout its trade area which encompasses East Liverpool and Lisbon, Ohio,
and surrounding communities. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their loan
agreements is dependent upon the economic stability of the tri-state area.
Nonperforming loans are comprised of commercial, mortgage, and consumer loans
which are on a nonaccrual basis, or contractually past due 90 days or more as
to interest or principal payment but are not nonaccrual status because they
are well secured or in process of collection. The following table presents
information concerning nonperforming loans.
1997 1996
---------- ----------
Principal outstanding December 31,
Ninety days or more past due and
accruing interest $ 102,054 $ 235,935
Impaired loans - 110,537
---------- ----------
Total nonperforming $ 102,054 $ 346,472
---------- ----------
The Bank had impaired loans of $110,537 as of December 31, 1996, with $45,876
of the allowance for loan losses allocated for them. The average recorded
investment in impaired loans during 1996 was $110,537, with no interest
recognized on such loans. The Bank had no impaired loans at December 31,
1997.
20
<PAGE>
5. LOANS (Continued)
As of December 31, 1997, aggregate loans of $60,000 or more extended to
officers, directors, and related affiliates or associates were $545,441. In
management's opinion, all of these loans were made on substantially the same
terms and conditions as loans to other individuals and businesses of
comparable creditworthiness. A summary of loan activity during the year is as
follows:
Amount
December 31, 1996 Additions Collected December 31, 1997
----------------- --------- --------- -----------------
$1,086,029 $304,229 $844,817 $545,441
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1997
and 1996, are as follows:
1997 1996
------------ ------------
Balance, January 1 $ 290,247 $ 266,073
Add:
Provision charged to operations 54,195 49,219
Recoveries 11,845 15,570
Less loans charged off 47,272 40,615
------------ ------------
Balance, December 31 $ 309,015 $ 290,247
============ ============
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at
December 31:
1997 1996
------------ ------------
Land and improvements $ 314,760 $ 270,981
Buildings and improvements 1,061,373 948,323
Leasehold improvements 66,447 28,649
Furniture, fixtures and equipment 762,086 641,146
------------ ------------
2,204,666 1,889,099
Less accumulated depreciation 782,541 673,184
------------ ------------
Total $ 1,422,125 $ 1,215,915
============ ============
Depreciation and amortization charged to operations was $128,689 in 1997 and
$124,834 in 1996.
21
<PAGE>
8. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $2,394,578 and $1,789,019 at December 31, 1997
and 1996, respectively.
Maturities on time deposits of $100,000 or more are as follows:
1997
-----------
Three Months or Less $ 1,140,425
Three to twelve months 767,298
Over One year 486,855
-----------
Total $ 2,394,578
===========
9. OTHER BORROWINGS
Securities sold under agreement to repurchase totaled $500,000 at December 31,
1997. The total represents one agreement, entered on December 16, 1997 with a
thirty-day maturity period. The Bank pledged U.S. Treasury notes with a
carrying and approximate market value of $500,000.
The Bank has a line of credit with a borrowing limit of approximately
$2,732,000 with the Federal Home Loan Bank of Cincinnati (FHLB) as of
December 31, 1997. This credit line is subject to annual renewal and incurs
no service charges. Outstanding borrowings on this line, and the term loans
noted below, are collateralized by a blanket security agreement on qualifying
residential mortgage loans and the Bank's investment in stock of the FHLB.
There were no borrowings outstanding on this line of credit at December 31,
1997 or 1996.
The Bank has two term loans outstanding with the FHLB which bear interest
rates of 6.70% and 6.75% (weighted average of 6.73%) with remaining payment
periods extending to August 1, 1999. The scheduled maturities of the term
loans at December 31, 1997, are as follows:
1997
-----------
1998 $ 109,473
1999 67,310
-----------
Total $ 176,783
===========
10.OTHER EXPENSES
The following is an analysis of other expenses:
1997 1996
------------ ------------
Stationery, printing, and supplies $ 54,230 $ 51,729
Postage 48,857 45,597
Professional services 67,185 61,750
State franchise tax 60,145 55,488
Other 383,195 346,174
------------ ------------
Total $ 613,612 $ 560,738
============ ============
22
<PAGE>
11.INCOME TAXES
The provision for income taxes consist of:
1997 1996
------------ ------------
Current $ 150,241 $ 148,596
Deferred 712 12,358
------------ ------------
Total $ 150,953 $ 160,954
============ ============
The components of the net deferred tax asset are as follows at December 31:
1997 1996
------------ ------------
Deferred Tax Assets:
Net unrealized loss on securities $ - $ 9,181
Provision for loan losses 89,882 86,111
------------ ------------
Gross deferred tax assets 89,882 95,292
------------ ------------
Deferred Tax Liabilities:
Net unrealized gain on securities 27,350 -
Depreciation 17,393 18,242
Accrual to cash conversion 45,568 38,851
Other 26,714 28,099
------------ ------------
Gross deferred tax liabilities 117,025 85,192
------------ ------------
Net deferred tax asset (liability) $ (27,143) $ 10,100
============ ============
No valuation allowance was established at December 31, 1997 and 1996, in view
of the Company's ability to carryback to taxes paid in previous years the
future anticipated taxable income which is evidenced by the Company's earnings
potential and the deferred tax liability amounts at each year end.
The reconciliation of the federal statutory rate and the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
% of % of
Pre-tax Pre-tax
Amount Income Amount Income
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Provision at statutory rate $ 229,843 34.0% $ 214,678 34.0%
Effect of tax free income (85,950) (12.7) (65,424) (10.4)
Other 7,060 1.0 11,700 1.9
------------ ------------ ------------ ------------
Actual tax expense and
effective rate $ 150,953 22.3% $ 160,954 25.5%
============ ============ ============ ============
</TABLE>
23
<PAGE>
12.EMPLOYEE BENEFITS
Profit Sharing Plan
- -------------------
The Bank makes discretionary payments to a trusteed, defined contribution
profit sharing plan covering substantially all employees and officers.
Contributions under the plan are determined annually by the Board of
Directors. The contribution for 1997 and 1996 amounted to $18,360 and
$16,293, respectively.
ESOP
- ----
The Bank also maintains an Employee Stock Ownership Plan (ESOP) covering
substantially all employees and officers. The Trustee has discretionary
authority to purchase shares of common stock of the Company in the open
market. The amount of the contribution to the ESOP is at the discretion of
the Board of Directors with benefits vesting over a seven year period.
Contributions totaling $7,000 and $6,000 were recorded during 1997 and 1996,
respectively. The Trustee held 2,884 and 1,246 shares of the Company's
common stock at December 31, 1997 and 1996, respectively.
Stock Option Plan
- -----------------
On January 23, 1997, the Board of Directors approved and stockholders ratified
the formation of a stock option plan. The plan will provide for granting
incentive stock options and nonstatutory stock options for executive officers
and nonemployee directors of the Company. A total of 50,000 shares of
authorized but unissued common stock are reserved for issuance under the plan,
which expires ten years from the date of shareholder ratification. The per
share exercise price of an option granted will not be less than the fair value
of a share of common stock on the date the option is granted. The options
granted on August 14, 1997 are currently available for exercise.
The Company adopted Statement of Financial Accounting Standards Statement No.
123, "Accounting for Stock-Based Compensation." This statement encourages,
but does not require the Company to recognize compensation expense for all
awards of equity instruments issued. The statement establishes a fair value
based method of accounting for stock-based compensation plans. Statement No.
123 permits companies to account for such transactions under Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," but
requires disclosure of pro forma net income and earnings per share as if the
Company had applied the Statement. The Company has chosen to follow APB No.
25 for accounting purposes.
24
<PAGE>
12.EMPLOYEE BENEFITS (Continued)
Under APB Opinion 25, no compensation expense has been recognized with respect
to the options granted under the stock option plan. Had compensation expense
been determined on the basis of fair value pursuant to Statement No. 123, net
income and earnings per share would have been reduced as follows:
1997
-----------
Net Income:
As reported $ 525,055
===========
Pro forma $ 431,709
===========
Basic Earnings Per Share:
As reported $ 1.28
===========
Pro forma $ 1.05
===========
Diluted Earnings Per Share:
As reported $ 1.28
===========
Pro forma $ 1.05
===========
The following table presents share data related to the stock option plan:
Shares Under Option 1997
------------------- -----------
Outstanding, January 1
Granted 17,000
Exercised -
Forfeited -
-----------
Outstanding, December 31 (exercise price of $21) 17,000
===========
13.COMMITMENTS
In the normal course of business, the Bank makes various commitments which are
not reflected in the accompanying financial statements. The Bank offers such
products to enable its customers to meet their financing objectives. The
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The Bank's
exposure to credit loss is represented by the contractual amounts as disclosed
below. Losses, if any, are charged to the Allowance for Loan Losses. The
Bank minimizes its exposure to credit loss under these commitments by
subjecting them to credit approval, review procedures, and collateral
requirements as deemed necessary.
25
<PAGE>
13.COMMITMENTS (Continued)
The off-balance sheet commitments were comprised of the following at
December 31:
1997 1996
------------- -------------
Commitments to extend credit $ 2,956,264 $ 3,010,678
Standby letters of credit 75,894 75,894
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement.
These commitments are comprised primarily of available commercial, personal
lines of credit, and loans granted but not yet funded. The Bank does not
charge fees for these customer credit lines. Since many of the commitments are
expected to expire without being fully drawn upon, the contractual amounts do
not necessarily represent future funding requirements.
Standby letters of credit represent conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. These
instruments are issued primarily to support bid or performance-related
contracts. The coverage period for these instruments is typically a one year
period, with an annual renewal option subject to prior approval by management.
The Bank holds collateral for these instruments, as deemed necessary.
The Bank leases a branch office site under an agreement which expires by the
year 2005 and on May 15, 1997 the Bank entered into five year lease agreement
to operate a branch office in the Calcutta, Ohio Wal-Mart Store. This office
is tentatively scheduled to open by the third quarter of 1998. These branch
agreements contain five year renewal options which are available if elected by
the Bank. At December 31, 1997, the minimum rental commitment for these
noncancelable operating leases is as follows:
1998 $ 57,215
1999 71,796
2000 71,796
2001 71,796
2002 71,796
2003 and thereafter 154,981
-----------
Total $ 499,380
===========
Occupancy expense includes rental expenditures of $50,880 for 1997 and 1996,
respectively.
14.ACQUISITION OF BRANCH OFFICE
Effective August 29, 1997, the Bank, pursuant to a purchase and assumption
agreement entered into with United National Bank of West Virginia (Seller),
assumed deposit liabilities and acquired the branch banking property,
facility, all cash funds on hand and selected commercial and consumer loans of
the New Cumberland, West Virginia operations.
26
<PAGE>
15.FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31 of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits with
other banks and federal funds
sold $ 5,683,303 $ 5,683,303 $ 5,577,100 $ 5,577,100
Investment securities 14,985,362 15,025,255 12,186,625 12,201,961
Net loans 25,703,416 26,093,000 23,761,378 23,962,000
Accrued interest receivable 318,956 318,956 306,112 306,112
------------ ------------ ------------ ------------
Total $ 46,691,037 $ 47,120,514 $ 41,831,215 $ 42,047,173
============ ============ ============ ============
Financial liabilities:
Deposits $ 42,903,547 $ 43,015,000 $ 38,690,227 $ 38,740,000
Securities sold under agreement
to repurchase 500,000 500,000 - -
Other borrowings 176,783 178,000 279,156 281,000
Accrued interest payable 73,417 73,417 67,477 67,477
------------ ------------ ------------ ------------
Total $ 43,653,747 $ 43,766,417 $ 39,036,860 $ 39,088,477
============ ============ ============ ============
</TABLE>
Financial instruments are defined as cash, evidence of an ownership interest
in an entity, or a contract which creates an obligation or right to receive or
deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made
by management based upon estimates which are inherently uncertain, the
resulting estimated fair values may not be indicative of the amount realizable
in the sale of a particular financial instrument. In addition, changes in the
assumptions on which the estimated fair values are based may have a
significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are
not considered financial instruments, the estimated fair value of financial
instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
27
<PAGE>
15.FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and Due From Banks, Interest-Bearing Deposits with Other Banks, Federal
- ----------------------------------------------------------------------------
Funds Sold, Accrued Interest Receivable, and Accrued Interest Payable
- ---------------------------------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
- ---------------------
The fair value of investment securities is equal to the available quoted
market price. If no quoted market price is available, fair value is estimated
using the quoted market price for similar securities.
Loans, Deposits, Other Borrowings, and Securities Sold Under Agreement to
- -------------------------------------------------------------------------
Repurchase
- ----------
The fair value of loans is estimated by discounting the future cash flows
using a simulation model which estimates future cash flows and constructs
discount rates that consider reinvestment opportunities, operating expenses,
non- interest income, credit quality and prepayment risk. Demand, savings and
money market deposit accounts, as well as securities sold under agreement to
repurchase, which are due within 30 days, are valued at the amount payable as
of year end. Fair values for time deposits, and FHLB term loans are estimated
using a discounted cash flow calculation that applies contractual costs
currently being offered in the existing portfolio to current market rates
being offered for deposits and notes of similar remaining maturities.
Commitments to Extend Credit and Commercial Letters of Credit
- -------------------------------------------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment or letter of credit,
and the fair value, determined by discounting the remaining contractual fee
over the term of the commitment using fees currently charged to enter into
similar agreements with similar credit risk, are not considered material for
disclosure. The contractual amounts of unfunded commitments and letters of
credit are presented in Note 13.
16. REGULATORY MATTERS
Cash and Due from Banks
- -----------------------
The district Federal Reserve Bank requires the Bank to maintain certain
reserve balances. As of December 31, 1997 and 1996, the Bank had required
reserves of $434,000 and $429,000, respectively, comprised of vault cash and a
depository amount held with the Federal Reserve Bank.
Dividends
- ---------
The Bank is subject to a dividend restriction which generally limits the
amount of dividends that can be paid by a national bank. Prior approval of
the Comptroller of the Currency is required if the total of all dividends
declared by a national bank in any calendar year exceeds net profits, as
defined for the year, combined with its retained net profits for the two
preceding calendar years less any required transfers to surplus. Using this
formula, the amount available for payment of dividends by the Bank to the
Company in 1998, without approval of the Comptroller, will be limited to
$728,400 plus 1998 net profits retained up to the date of the dividend
declaration.
28
<PAGE>
16.REGULATORY MATTERS (Continued)
Capital Requirements
- --------------------
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, an entity must meet specific capital guidelines
that involve quantitative measures of the assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The entity's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by the regulation to ensure capital adequacy
require an entity to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital to average assets (as defined). Management believes, as
of December 31, 1997 and 1996, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the appropriate
regulatory authorities categorized the Company and Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an entity must maintain minimum Total
Risk-Based, Tier I Risk-Based, and Tier I Leverage ratios at least 100 to 200
basis points above those ratios set forth in the table. There have been no
conditions or events since that notification that management believes have
changed this category.
The capital position of the Company does not materially differ from the
Bank's; therefore, the following table sets forth the Company's capital
position and minimum requirements as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Amount Ratio Amount Ratio
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Total Capital to
Risk-weighted Assets
- --------------------------------
Actual $ 4,640,404 17.62% $ 4,299,784 18.11%
For Capital Adequacy 2,107,040 8.00 1,899,600 8.00
To Be Well Capitalized 2,633,800 10.00 2,374,500 10.00
Tier I Capital to
Risk-weighted Assets
- --------------------------------
Actual $ 4,331,389 16.45% $ 4,009,537 16.89%
For Capital Adequacy 1,053,520 4.00 949,800 4.00
To Be Well Capitalized 1,580,280 6.00 1,424,700 6.00
Tier I Capital to Average Assets
- --------------------------------
Actual $ 4,331,389 8.81% $ 4,009,537 9.78%
For Capital Adequacy 1,971,480 4.00 1,640,000 4.00
To Be Well Capitalized 2,464,350 5.00 2,050,000 5.00
</TABLE>
29
<PAGE>
17.PARENT COMPANY
CONDENSED BALANCE SHEET
December 31,
1997 1996
---------------- ----------------
ASSETS
Investment in subsidiary bank $ 4,469,714 $ 3,991,714
Other assets 45,065 44,175
---------------- ----------------
Total assets $ 4,514,779 $ 4,035,889
================ ================
STOCKHOLDERS' EQUITY $ 4,514,779 $ 4,035,889
================ ================
CONDENSED STATEMENT OF INCOME
For the Period
Year Ended June 1, 1996 to
December 31, 1997 December 31, 1996
---------------- ----------------
INCOME
Dividends from subsidiary $ 137,473 $ 152,932
---------------- ----------------
EXPENSES 29,551 7,741
---------------- ----------------
Income before income taxes 107,922 145,191
Income tax benefit (10,047) (3,738)
---------------- ----------------
Income before equity in undistributed
earnings of subsidiary 117,969 148,929
Equity in undistributed earnings of
subsidiary 407,086 108,493
---------------- ----------------
NET INCOME $ 525,055 $ 257,422
================ ================
30
<PAGE>
17.PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the Period
Year Ended June 1, 1996 to
December 31, 1997 December 31, 1996
---------------- ----------------
OPERATING ACTIVITIES
Net income $ 525,055 $ 257,422
Adjustment to reconcile net income to
net cash provided by operating
activities: Undistributed earnings
of subsidiary (407,086) (108,493)
Other, net (891) (44,175)
---------------- ----------------
Net cash provided by operating
activities 117,078 104,754
---------------- ----------------
FINANCING ACTIVITIES
Cash dividends paid (117,078) (104,754)
---------------- ----------------
Net cash used for financing
activities (117,078) (104,754)
---------------- ----------------
Net change in cash - -
CASH AT BEGINNING OF PERIOD - -
---------------- ----------------
CASH AT END OF PERIOD $ - $ -
================ ================
31
<PAGE>
TRI-STATE 1ST BANK, INC.
Officers and Directors
OFFICERS
Charles B. Lang Lois J. Curran
President of Tri-State Bank, Inc. Vice President,
Chairman of the Board of Senior Lending Officer
Directors & Chief Executive Officer
of 1st National Community Bank Roger D. Sanford
Vice President & Branch Manager
Keith R. Clutter
Secretary of Tri-State 1st Bank, Inc. R. Keith Broadbent
President & Cashier of 1st National Vice President, Loans
Community Bank
Steven A. Mabbott
Gary R. Jones Assistant Vice President, Loan
Chief Financial Officer Department Manager
Vickie Lynn Owens
Assistant Cashier
DIRECTORS
Charles B. Lang G. Allen Dickey
President of Tri-State Chairman of D. W. Dickey &
1st Bank, Inc. Sons, Inc.
Chairman of the Board of Directors &
Chief Executive Officer of 1st Marvin H. Feldman
National Community Bank Partner of The Feldman Agency
Keith R. Clutter John P. Scotford, Sr.
Secretary of Tri-State 1st Bank, Inc. Chairman of McBarscot Company
President & Cashier of 1st National
Community Bank John C. Thompson
Chairman of The Hall China Company
William E. Blair, Jr.
President of Bill Blair, Inc. R. Lynn Leggett
Director, Eells-Leggett Funeral Home
Stephen W. Cooper
President of Cooper Insurance Agency
FORM 10-KSB AND 10-QSB AVAILABILITY
Copies of the Company's Annual Report on Form 10-KSB and the Quarterly Reports
on Form 10-QSB filed with the Securities Exchange Commission will be furnished
to any shareholder, free of charge, upon written request to Charles B. Lang at
the following address:
Tri-State 1st Bank
16924 St. Clair Ave., Box 796
East Liverpool, OH 43920
Phone: (330) 385-9200
33
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,032
<INT-BEARING-DEPOSITS> 101
<FED-FUNDS-SOLD> 1,550
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,088
<INVESTMENTS-CARRYING> 1,897
<INVESTMENTS-MARKET> 1,937
<LOANS> 26,597
<ALLOWANCE> 309
<TOTAL-ASSETS> 48,326
<DEPOSITS> 42,904
<SHORT-TERM> 609
<LIABILITIES-OTHER> 231
<LONG-TERM> 67
0
0
<COMMON> 1,284
<OTHER-SE> 3,231
<TOTAL-LIABILITIES-AND-EQUITY> 48,326
<INTEREST-LOAN> 2,507
<INTEREST-INVEST> 752
<INTEREST-OTHER> 137
<INTEREST-TOTAL> 3,396
<INTEREST-DEPOSIT> 1,317
<INTEREST-EXPENSE> 1,332
<INTEREST-INCOME-NET> 2,064
<LOAN-LOSSES> 54
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 1,685
<INCOME-PRETAX> 6676
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 5.40
<LOANS-NON> 0
<LOANS-PAST> 102
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 290
<CHARGE-OFFS> 47
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 309
<ALLOWANCE-DOMESTIC> 62
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 247
</TABLE>
